Competing for growth

Competing for growthHow business is growing beyond boundaries

Executive summary — how business is growing beyond boundaries 2

New markets — how high-performing companies are approaching 4 rapid-growth markets

New products and services — how high performers are innovating 16 for success

New talents and skills — how high performers are capturing and 26 retaining the talent they need

About this report 36

In this report

The benchmark findings for this report are drawn from two studies conducted between January and February 2011 in parallel for Ernst & Young by the Economist Intelligence Unit. To explore what companies were doing as they entered new markets and innovated, we interviewed some 400 C-suite and marketing professionals. To explore how companies were addressing talent management, we interviewed 400 C-suite and HR directors. As with our earlier study, we have factored out the impact of sector and distinguished between the top third highest performers — in both revenue and EBITDA growth — and the lowest third to see if we can identify distinctive patterns of action that might explain the superior performance.

1Competing for growth How business is growing beyond boundaries

The new economy is more competitive than the old. Greater variation in market performance, sharper market volatility, ceaseless pressure on margins and demanding stakeholders have made for an increasingly interconnected — and interdependent — global economy.

In our first Competing for growth report, we interviewed some 1,400 companies from around the world to see how they were responding. Our study showed that successful players — the top quartile in both revenue and EBITDA growth – have focused on executing four drivers of competitive success:

Customer reach — to optimize their potential market•Operational agility — to maximize their effective response•Cost competitiveness — to optimize their profitability•Stakeholder confidence — to secure both talent and support for achieving their •goals

This report seeks to test and build on these findings, by exploring how the drivers of competitive success are being applied to the three fundamental sources of organic growth: entering new markets, creating new products or services and developing the new skills required to deliver enhanced, or cheaper, offerings.

By digging deeper into what successful companies are doing, we can draw insight and offer guidance on how they are achieving their success.

Customerreach

Operationalagility

Stakeholderconfidence

Cost competitiveness

Focus onkey segments

Create flexible work/delivery

platforms

Acceleratespeed of response

Improvecollaboration

Optimizecapital

Masterinnovation

Sustain cost reduction

Inform pricing process

Pass on cost pressure

Prioritizemarkets

Reinforcebrand

Broaden product/service offer

Identify and explain risks

Re-engage withinternal talent

Anticipateregulatory compliance

Enhancereporting

High performers do better

on …

For each of the four drivers — customer reach, operational agility, cost competitiveness and stakeholder confidence — higher performers have adopted a distinctive set of actions, or have made further progress, in implementing each program.

2 Competing for growth How business is growing beyond boundaries

How business is growing beyond boundaries

Executive summary

Customerreach

Operationalagility

Stakeholderconfidence

Cost competitivenessGrowth

New markets

New ta

lent

s

New

products

The Competing for growth model is an effective framework to help management understand its comparative

position in responding to the new economic reality. The challenge is great, but competitive success is more

likely for those companies that achieve the optimal balance between their customer reach, operational

agility, cost competitiveness and stakeholder confidence.

Our most recent research has reinforced our belief in the value of the framework. Its application can be seen to drive high performance in achieving profitable and organic growth from the three core sources:

In new markets

High performers approach new markets through a deep understanding of their target customers. They have broadened the range of their products and developed them close to their markets to better meet their needs. They move pricing as close to the market as possible and as much under their control as possible. And they take their stakeholders with them — through clear and specific communication about both markets and challenges.

In product and service innovation

High performers approach new product and service development faster and closer to the market so that they can get further up the value curve and secure better prices for their efforts. They achieve this performance through more inclusive innovation approaches that extend beyond product development. And they take their stakeholders with them by sharing more detail on the potential of their innovation — and the progress they are making with it.

In talent management

High performers approach their talent resources with the same intensity that they approach their customers. Successfully accessing wider groups allows them to build the diversity that they need. Recognizing that their talent is an asset to protect, they select carefully and pay more to retain — while recognizing that pay is only part of the implied contract that such talent demands.

The actions within these three areas may differ, but they all result from a company having an integrated view of its distinctive growth opportunity and executing it effectively across their organization. This, in turn, stems from having a powerful positioning that

resonates in the market and with both internal and external stakeholders. For positioning, like market leadership, is a tool rather than just a goal. It is the result of management action and can be changed. By studying the actions of others, management can be better placed to improve their own position.

For the purposes of our research, we have treated the three sources of organic growth as separate, but in reality, they overlap into a suite of connected opportunities and challenges. To grow successfully, companies need to look beyond these boundaries — indeed way beyond their own current boundaries — to identify their future path.

Going forward, Ernst & Young plans a number of future studies to drill down further into the global growth agenda.


How successful companies are driving their growth

New markets New products New talents

Customer reach

Choosing markets carefully Preferring India and China • — these countries dominate globally, but there are clear regional approaches, particularly with regard to the next generation of rapid-growth markets

Going beyond the figures to • develop a deeper understanding of the real nature of their target market

Being clearer as to their target • segment within each market

Being driven by current demand

Increasing product ranges • significantly — some 30% of high performers have increased their product range by more than 20% in the past two years

Focusing on current customers • and employees as primary sources of innovation

Building the right team to activate quickly

Paying greater attention to • technical and operational roles in setting up new operations

Going outside the organization • and traditional sources for management and skills

Operational agility

Beingflexible,butcautiousAchieving sales more quickly • — using sales agents for quick entry, but seeking management control of longer-term operations

Being flexible as to their • approach to market entry, but seeking to learn from experience

Moving quickly from idea to market

Following a formal process for • innovation, but with greater clarity on “go/no go” criteria and process oversight by business management

Adopting a structured “from • thought to finish” process with launch and review built into the plan from the start

Beingmoreselective,butfaster to develop and deploy

Investing significant time and • effort to recruit senior management, while moving quickly for rapid-growth opportunities

Putting greater focus on fast • routes of staff development

Moving resource into markets, • but with an explicit knowledge transition expected

Cost competitiveness

Seeking control of price and profit

Moving pricing closer to the • target market to capture more opportunities

Achieving greater control of • cost bases

Moving production closer to the • target market

Acting to capture more valueStructuring cost base to • capture value — increasing marketing spend to capture margin

Locating innovation closer to • target markets — increasingly in rapid-growth markets

Engaging in a battle for talentExperiencing higher staff • turnover and challenges in getting the talent they need

Being willing — and able — to • pay for talent but recognizing this is only part of the equation

Stakeholder confidence

Being more transparent through detail

Finding market entry more • costly than expected in terms of cash and time

Sharing more detail about their • new market strategy

Taking their stakeholders with them on the journey

Providing more detail to • external stakeholders on opportunity and risk

Identifying and rewarding • innovative talent

Being more engaged with engagement

Starting from a better position • to grow — handled the challenges of the recession better

Focusing on engagement • through commercial effectiveness

4 Competing for growth How business is growing beyond boundaries4

New markets: what we learnt last time

The first Competing for growth study showed there is caution around entering new markets. Respondents were clearly aware of the length of time it takes to break even in a new market, i.e., 60% believed it would take over a year, with little variation between high and low performers.

The warning from Competing for growth was that while entering new markets may be the right thing to do, rapid-growth markets are only part of the reason for today’s success. High performers seem to be focusing on initiatives that have a more short-term, if not an immediate return with current customers in current markets before addressing new market entry.

What the current research shows, however, is that when high performers are satisfied that the time is right to address new market entry, they do so with clarity of focus, speed of execution and transparency of communication.



High performers have a focus on their current customers that runs like a thread through their operations. It determines the markets where they wish to sell and produce and how they enter and operate. Consequently, one of our key findings in our initial Competing for growth study was the continued importance of developed markets to these companies. While we found growing interest in rapid–growth markets, they were perceived to be especially competitive and not by themselves, the whole story for high performers.

It is clear, however, that rapid–growth markets will be an increasing factor going forward. To address this, we focused our research on whether differences exist between high and low performers in their approach to these markets. It is clear that high performers are not alone in their pursuit of cross-border opportunities, nor do they appear to be pioneering ahead into new territories. Rather, it is their execution of these opportunities — focused in purpose, fast to deliver, and thoroughly explained to their stakeholders — that seems to explain their success.

High performers are doing better on:

Customer reach — choosing markets carefullyPreferring India and China — these countries dominate globally, •but there are clear regional approaches, particularly with regard to the next generation of rapid-growth markets

Going beyond the figures to develop a deeper understanding of •the real nature of their target market

Being clearer as to their target segment within each market•

Operationalagility—beingflexible,butcautiousAchieving sales more quickly — using sales agents for quick •entry, but seeking management control of longer-term operations

Being flexible as to their approach to market entry, but seeking •to learn from experience

Cost competitiveness — seeking control of price andprofit

Moving pricing closer to the target market to maximize the •opportunity

Achieving greater control of their cost base •

Moving production closer to the target markets•

Stakeholderconfidence—beingmoretransparentthrough detail

Finding market entry more costly than expected in terms of •cash and time

Sharing more detail about their new market strategy •

New markets What high performers are getting right

New markets: new frontiers in consumer productsAs globalization continues to expand horizons, companies in the consumer products (CP) sector are actively searching for new markets, and new opportunities.

CP companies need to utilize a tailored approach to overcome the inherent challenges of market entry in developing economies.

A move into rapid-growth markets typically involves operating in less certain political and regulatory landscapes, as well as transacting in a more volatile currency. Already, they are faced with the competitive presence of local CP companies — not yet global in scope, but powerful in ambition and entrepreneurial in nature. Agile and not averse to taking risks, these local companies understand their local consumers and benefit from a low-cost business model.

CP companies are relying on projections of future data to underpin their move into such markets. They need to be aware that premiums are high for talent and distribution in emerging economies, principally because they are such competitive markets. It may therefore take longer for their investment to turn into desired return, and it will be longer before their business starts performing to the normal expectations of more mature markets. It will be longer still before they know whether their demographic projections are accurate and whether the political and regulatory terrain will become more certain.

And yet, despite these challenges, it is no exaggeration to say that a paradigm shift is under way; within five years, more than 60% of the revenue of larger CP companies is set to come from the the rapid-growth markets. With low-volume growth forecast in North America and Western Europe, it is increasingly clear that, for CP companies both large and small, the rapidly developing economies hold the key to a prosperous future.


Preferring India and China

From a global perspective, we found that India (34%) and China (33%) dominated the sales focus of all our respondents — with Brazil (19%), Russia (14%) and Singapore (11%) some way behind. High performers, however, had a much greater focus on India (47%), followed closely by China (44%) and, to lesser degree, Brazil (26%). Lower performers had a lower and broader sales focus, with the same three countries to the fore, but a similar level of interest in Poland, Mexico and Singapore.

The importance of India and China remain the same regardless of where companies are headquartered, although other key destinations in the top five are more regionally distinct: Singapore and Indonesia for Asia-Pacific, Middle East and Russia for Western Europe, and South Korea and Mexico for North America. Looking more broadly, the top 10 sales markets have a clearer regional tone to them.

It appears that the combination of high volume and rapid growth in the India and China markets lifts them outside the normal more regional focus. Brazil can be seen to continue to emerge, while Russia’s relative importance has declined. While it retains fifth position for European companies’ sales, it has declined for

Given the increased variation in geographical market growth, the choice of which market to compete in has a

critical impact on company performance. This seems a statement of the obvious, but given the huge variation

that exists throughout both markets and company operations, its implications are immense. The world is

not flat, our starting points are not the same, but with global mobility of capital, the consequence of this

variation affects all players.

Customer reach Choosing markets carefully

New markets

Most important markets for sales based on location*

Asia-Pacific Western Europe North America

High Low High Low High Low

1 India 71 70 India 45 20 China 46 47

2 China 55 75 China 44 24 India 36 41

3 Brazil 25 35 Middle East 36 18 South Korea 32 6

4 Singapore 25 5 Brazil 26 16 Brazil 23 25

5 Indonesia 18 20 Russia 19 25 Mexico 18 19

6 Bangladesh 11 5 Poland 15 14 Poland 14 22

7 Middle East 11 0 Romania 11 10 Chile 14 9

8 Russia 9 10 Turkey 11 7 Argentina 9 22

9 Malaysia 9 5 Mexico 8 13 Columbia 9 9

10 Vietnam 7 5 Ukraine 8 4 Philippines 9 6

Asia-Pacific and fallen out of the top 10 for companies based in North America. The term “BRIC” has been superseded.

But it is not clear that a new global acronym can be developed. Looking toward the next generation of rapid-growth countries — the post-BRIC group — no simple category of countries exists. Countries such as Poland, Mexico and Argentina increase their importance, but it is apparent that there is a difference in focus for sales between the high performers and the low performers and that this varies by region.

High performers from Western Europe have a greater focus on •Middle East, Eastern Europe, Turkey and the Ukraine. Other than Indonesia and Mexico, they appear to have less focus on Asia-Pacific and Latin America.

High performers from North America seem to be focused on •Latin America. Other than South Korea and the Philippines or Poland in Europe, the focus is strongly regional.

Asia-Pacific companies have more of an Asia-Pacific focus, •regardless of whether they are high or low performers.

* Post–BRIC group highlighted


High performersLow performers

GDP growth forecasts

Demographic profile andprojections

Political stability

Inflation and macroeconomicstability

Purchasing power parity

Income per head

Gap between wealthy and poor

Social factorsaffecting purchasing power

Credit growth

Reputational risk

Size of the grey/black market

4043

42

37

38

4849

15

66

1012

14

3234

32

2629

1819

94

Factors affecting entrance into rapid-growth markets

Goingbeyondthefigurestodevelopadeeperunderstanding of the real nature of the target market

All respondents generally rated economic and demographic factors highly in determining the markets that they would prioritize for investment, with inflation and purchasing power parity assessments also important. The number of people multiplied by high GDP growth seems as reasonable a starting point for market assessment as any, although the accuracy of both measures may be much less certain than expected. Given the degree of economic reforecasting and correction within the developed world, complete accuracy in rapid–growth markets would be unrealistic. But, while it could be argued that such corrections in these markets have tended to be on the upside, even excessive demand can unbalance a lean supply chain.

Other factors are also important. Regulatory structures, for example, are crucial — especially from a sector perspective. For the power and utilities sector, for example, the regulatory environment dictates a company’s investment model. If such companies were to move into deregulated markets, they would almost invariably have to be the lowest price in order to win market share from incumbent competitors. Financial services companies are also heavily impacted by regulatory changes. Here, different levels of regulation are being implemented on a global, regional and country-by-country basis. The challenge for companies operating in this sector is not to treat regulatory systems in an isolated, localized way, but to take a step back and consider how such regulation can be turned into an opportunity, rather than an obligation.

High performers, however, regardless of sector, placed less emphasis on simple quantitative demographics and income-per-head factors. Indeed, high performers focused on political stability more than other players — a key driver of market stability in addition to inflation risks. Furthermore, although lower on their list of priorities, high performers also placed greater emphasis on gaining a deeper understanding of social factors affecting purchasing behavior and understanding the reputational risk of transacting in particular markets. The performance challenge is not simply entering the market, but competing successfully against domestic incumbents. This requires getting beyond the numbers to understand the critical local characteristics of the market. To win in India and China requires that you understand the market as well as local companies and can leverage an unmatched advantage against them.


Customer reach Choosing markets carefully

New markets

Being clearer as to their target segment within each market

Rapid-growth markets are complex. Much depends on the ever-changing demographics as the group is far from homogenous. Some segments comprise small numbers of individuals with high levels of wealth, offering potential for high price points. There is a long history of these groups being targeted by international companies. Other segments offer greater numbers of customers — and hence larger volumes — though lower pricing. The Indian middle class, a popular target with an average income of US$4,000, may not be very rich compared with their Western counterparts, but numbering over 400 million, they represent a huge opportunity. It is this latter “volume” segment that is driving fundamental change in business models, because the challenge of serving them profitably is so different for companies from developed markets.

We asked all our respondents which customer segments they were focusing on — and in which markets. There were companies focused across the different segments for each market, but there were distinctive patterns in the response. Of the 23 major emerging markets, there was significant variation by country:

“Premium customers” were the most highly targeted segment •in only three locations: Russia, the Middle East and China. Each areas where there are distinct groups with immense personal wealth

The “middle-market/aspirational” segment was the most highly •targeted segment in 10 countries: India, South Africa, Turkey, Argentina, Singapore, Indonesia, Philippines, Malaysia, South Korea and Taiwan

“Cost-conscious or value” segment customers were the main •targets in Eastern Europe and Latin America

Only in Thailand did a majority of our respondents target the •“commodity” segment

There was, however, much greater variation in focus when company performance was considered. The majority of high performers target:

“Premium” customers in the Middle East, Russia, China and •Latin America

“Mid-market” customers in Africa, Brazil and the rest of the Asia•

“Cost• -conscious” customers in Eastern Europe

A mixture of segments in India•


In contrast, low performers almost always highlighted that they were targeting the broad “middle market.” This suggests that a more focused approach — whether low-volume high-value, or cheaper mass market — is driving enhanced performance. It might

Market segment of greatest focus for sales — majority responses

also suggest that, regardless of the scale of future potential, the intense competition for the “middle market” — and the scale of operational challenge it presents — is currently impacting overall performance for some players.

High performers Low performers

Greatest area of focus % Greatest area of focus %

Africa Mid–market 35 Mid–market 43

Brazil Mid–market 33 Mid–market 31

China Premium 31 Mid–market 30

India Mid–market 30 Mixture 26

Middle East and North Africa Premium 38 Mid–market 43

Russia Premium 35 Mid–market 46

Other Eastern Europe Cost–conscious 28 Mid–market 36

Other Far East Mid–market 32Mid–market Cost–conscious

3333

Other Latin America Premium 26 Cost–conscious 36


Agility implies both speed and flexibility. In terms of new market opportunities, it requires both an ability to

respond to an opportunity quickly but, equally, to preserve the control necessary to move out of a market

as painlessly as possible, should the situation deteriorate. In a volatile market, windows of opportunity both

open and close with increasing speed.

Speedtoenter,butabletoexit

Companies have quite different perspectives on what are either the quickest or the most effective ways of entering a market, but high performers appear to adopt a more cautious approach. Working with a local distributor was recognized by all respondents as being the fastest way of entering a market. High performers, however, are both significantly more likely to focus on working with a sales agent and less likely to establish a joint venture partnership or make an acquisition than low performers. In such a way, they are speeding the access to the market but with the least capital or contractual exposure.

Working with local distributors

Working with a sales agent

Acquiring local private company

Establishing a joint venture partnership

Winning a privatization tender

Establishing a greenfield investment 54

42

4756

21

24

914

30

32

35


Fastest rapid–growth market entry strategies

Most effective rapid–growth market entry strategies


Establishing a joint venture partnership

Acquiring local private company

Working with local distributors

Establishing a greenfield investment

Working with a sales agent

Winning a privatization tender 7

37

37

4149

20

34

161616

15

30

Once the opportunity had shown merit, all respondents felt that establishing a joint venture partnership was the most effective route to take advantage. Indeed, in many rapid-growth markets it may be required. High performers, however, if given the choice, were more likely to place importance on making an acquisition or establishing a green field investment rather than working with a local partner. It seems that control is recognized as a precursor to speed and flexibility. Minimizing contractual obligations to partners maximizes the ability to respond and, if necessary, to exit.

Operational implications clearly vary based on whether a company simply has a sales operation in a market or has a production facility in that market as well. Governments will see the production facility as offering the attractive potential of future employment. They may put in regulations to require this over time.

This cautious approach is reflective of a different perspective that high performers seem to share about the obstacles that present the greatest challenges in rapid growth markets. All respondents listed lack of bureaucratic clarity as the biggest obstacle. But while low performers listed slow customs, punitive taxes or arbitrary courts — all major potential downside risks — high performers had much more macro–level concerns about more widespread and likely political and macro-economic risk. If your main challenges are expected in the course of business, building nimbleness into your operation is essential.

Operational agility Being flexible, but cautious

New markets


We approach new marketsin a consistent way


Our approach variesslightly by market


Our approach variessignificantly by market


27

39

34

22

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30







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34

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Consistency of approach to market entry

Beingflexibleastotheirapproachtomarketentry,but seeking to learn from experience

While recognizing market variation, high performers are more polarized in their approach to market entry than low performers. A significant number plan market entry based on the needs of their target clients and past experience. High performers were significantly more likely to say that they had a consistent approach that they leveraged for speed and effectiveness. But, equally, high performers made up a majority of the larger group that responded that their approach varied significantly by market to optimize flexibility.

This polarization is also driven by both sector and market choice. Market entry options are not always fully under the control of management. The governments of certain rapid-growth markets impose the route of entry in some, if not all, sectors. There is, however, some variation in the market entry strategy adopted by our respondents depending on their regional location. While there is a mixture of response from all regions, there is a difference in where the majority focused:

43% of Asia-Pacific's high performing companies reported that •they varied their approach considerably based on the market

55% of North America's high performing companies reported •that their approach varied slightly by market

38% of Western Europe's high performing companies reported •that they had a consistent approach to market entry

A number of factors could explain this difference, but it is probably most likely explained by the longer experience of market entry that many companies in Western Europe will have had — not least into other European markets. The more consistency developed, the greater the opportunity for organizational learning.

High performers

Low performers


Cost competitiveness Seeking control of price and profit

New markets

In our original Competing for growth research, we found that high performers were much more in control

of their pricing than low performers. Some 28% had introduced new pricing strategies in the past two years

and they were significantly ahead in seeking to support better pricing through better systems and improved

analytics. Consequently, a larger number were able to push through price rises — even in a difficult time. They

saw price as the starting point for their consideration of cost, rather than the other way around.

Moving pricing closer to the target market

Our most recent research shows that pricing remains one of the most complex and strategic decisions that a business takes in its operations. During the recession, many companies acted to take these decisions to the centre in the interest of both speed and perceived control. High performers share this concern, but they are just as likely to have pushed pricing to the regional level rather than the center. Thirty-three percent of high performers made pricing decisions at the regional level, compared with 29% of low performers. In contrast, 37% of low performers made decisions at a global level, compared with only 33% of high performers.

This confirms the findings from our earlier report Winning in a polycentric world. These findings showed that the convergence of market potential between the developed and rapidly developing world means that the number of markets that multinationals must consider as “strategic” has increased. But, at the same time, the nature of the opportunities in those markets can be fundamentally different. In the developed world, companies have well-established business models and asset bases, but face weak growth prospects. In the rapidly developing economies, this situation is often reversed. The reality of the global economy may be more variation in operations rather than less.

Achieving greater control of their supply chain

We sought to explore how respondents were addressing their supply chain in support of their wider market footprint. While there is a great deal of variation between sectors and markets, there does seem to be a difference in the focus of high performers.

High performers were more likely to seek and achieve greater control of the factors that impact their pricing and their costs. This is supported by examining responses on the factors that have the greatest impact on pricing to serve key customers in rapid-growth markets. In almost all cases, low performers felt that factors such as import costs, distribution, transport, and, indeed, relative negotiating strength with third parties, had a bigger impact on their pricing than high performers did.

We also asked respondents what were the key factors impacting cost in serving their customers in rapidly developing markets. Distance from production to market was the major factor for both groups, but significant differences between high performers and low performers were reported:

Labor costs play a more significant role in determining high •performer cost base than for low performers

Import and customs costs are a far more significant element in •low performers’ costs both in proportion and priority

Transport infrastructure costs are also more significant for low •performers, suggesting that the distances are greater

This analysis of cost suggests that high performers have moved to locate a larger proportion of production close to — and often in — the markets they aim to serve. In turn, this supports the view that economies of scale — certainly above a certain level — are no longer the dominant factor in competitive success.

Location of decisions on pricing of goods and services


At global headquarters

At regional level

In the rapid-growth market itself

By third-party agents,distributors or partners

A combination of any

33

3337

2917

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The most important growth markets for production

Vietnam

Russia

India

China

Singapore

Middle East

South Korea

Mexico

South Africa

Indonesia

Philippines

Bangladesh

Colombia

Poland

Argentina

Brazil

Malaysia

Chile

Romania

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Malaysia

Brazil

China

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Pakistan

Mexico

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Romania

Thailand

Russia

Middle East

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Russia

Ukraine

Romania

Bangladesh

India

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Brazil

Poland

Mexico

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Colombia

Pakistan

Philippines

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Indonesia

Thailand

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For North America based companies ForAsia-Pacificbasedcompanies For Western Europe based companies

Moving production closer to the target market

The top markets for production for all respondents are China (30%), India (28%), Brazil (12%) and Mexico (12%). High performers, however, have a much greater focus on India (43%) and China (41%), which almost exactly mirrors their sales focus.

But when we look at the location of respondents, some strong regional differences emerge between high and low performers in their attitude to location:

40% of leading Western Europe businesses have identified India •as their primary destination for investment, whereas only 21% of lower performers have the same focus.

For Asia-Pacific based companies, almost two-thirds of higher •performers are focusing on India compared with just over half of lower performers. This suggests that a focus on India in certain markets contributes to growth.

The picture in North America is, however, rather different. China •is the leading destination for investment in production, with 41% of leading businesses focusing on this market, compared with 31% of lower performers.

While large differences clearly exist between high and low performers in their first choice of destination, the variance between their second choice of production location is no more than 2%. It is worth noting that, while 50% of Asia-Pacific production focus is within their own region, this falls to only 20% for companies based in North America.


Stakeholder confidence Being more transparent through choice

New markets

Finding market entry more costly than expected in terms of cash and management time

In a forthcoming report — CFO: mastering the costs of entry — we ask some 900 CFOs to comment on their experience of investing in rapid-growth economies. In almost a third of cases, the costs, time spent or risk was higher than expected. While there was consistent difficulty reported on finding reliable business partners, valuing potential acquisitions and budgeting for the short– to medium–term costs of entry, high performers typically spent more time on strategy development, but especially on valuing the wider market opportunity and undertaking due diligence. Both sets of problems have a similar source in the ongoing challenge in accessing high quality and reliable data upon which to base both market assessment and entry route. High performers, however, are clearly looking both more widely and more carefully at the opportunity for them.

Sharing more detail about their new market strategy

It is not simply a question of volume of information that might explain the communication success of high performers. Regardless of performance, companies report their perspective of the business prospects in the markets in which they operate and this includes a discussion of risk. Indeed, high performers place less importance on the historical performance of the different business units.

Nor is it an issue simply of the quality of material — there is much less emphasis placed on the quality of forecasting than we would have expected, although this could be explained by the ongoing nature of the high performers dialogue with their stakeholders.

There is also a variation in type and detail of information. Rather than talking about regions or geographical clusters, high performers talk about specifics. In addition, they seek to provide both broader and more granular data with more coverage of non-financial KPIs. And they are more likely to discuss the impact of regulatory change and potential environmental risks.

They are also more specific about operational efficiency measures — and their impact on the wider business — as well as the tax exposure they face.

We continue to observe that high performers are reporting more extensively than low performers. This

is particularly evident in the extent of the information they provide to external stakeholders on the new

markets they are entering. The market determines risk and the regulatory regime – and hence the amount

that you need to report to your market. Some markets are more of a challenge than others and need more

attention. And companies have a lot to explain.


Identifying reliable business partners

Valuing potential acquisitions

Short- to medium-term costs of entry

Strategy development

Valuation of market opportunities

Identifying M&A targets

Due diligence

464645

4244

48

3526

25

2522

17

3633

Most difficult market entry issues


Countries involved

Business prospects in market

Risk assessments

Cash and liquidity positions

Latest performance

Accuracy of growth forecasts

Operational efficiency measures

Tax exposure

Impact of regulatory change

Environmental risks

36

36

34

55

5049

44

47

47

42

2940

2516

22

18

16

11

12

12

Information provided to external stakeholders on entering rapid-growth markets

15Competing for growth How business is growing beyond boundaries 15Competing for growth How business is growing beyond boundaries

Key questions for managementHave you chosen the right markets for your •business?

What is your position with regard to India and China?•How deeply do you understand your target •customers?

What is different about your competitors and better •about you?

How much of your pricing do you control?•How much of the opportunity do you communicate •to your stakeholders?


New products and services: what we learnt last time

The first Competing for growth study highlighted innovation as a critical area for competitive success. It also showed that a top priority for high performers is the introduction of a broader range of products and services to improve return from existing customers. Sixty-two percent of high performers used new products and services as a means to increase sales, compared with only 44% of low performers.

The research showed that, while low performers are more focused on cost competition, high performers are driving into new markets and product areas where price competition is less intense.

Our most recent research drills down into how high performers are succeeding in this drive for new products and services. Closeness to the market, self belief, the right talent and stronger processes are all part of the competitive mix.



Innovation: cleaning up in cleantechFew sectors have grown as fast, or as widely, as clean technology (cleantech) in recent years. Helping deliver economic growth, jobs, energy security and carbon reduction, cleantech’s rapid expansion has been underpinned by the success of innovative and entrepreneurial industry leaders in utilizing the renewable resources that exist around the world.

A diverse sector, with a number of different technologies within its orbit, the industry's development has been one of the key economic success stories of recent years. Indeed, its very diversity has been a large factor in its success; solar, wind and biomass are just some of the technologies that have been driving the sector forward.

And yet, with a number of new technologies emerging, it is clear that this is one industry which exists in a state of permanent innovation. One area that is attracting much attention from investors is “efficiency technologies.” While these aren’t necessarily new, they can be used in innovative ways to deliver large savings in costs and energy. An example is light-emitting diodes (LEDs), which use a fraction of the energy needed for more traditional lighting. Lasting for a lifetime, they can provide consumers with savings for many decades and, as an easy and cost-effective means of saving energy, their potential is enormous.

In addition, second generation biofuels are being aggressively researched, as are tidal, offshore wind and a whole host of other technologies. There are some in this sector who are comfortable with new innovations failing as long as those that succeed deliver real and radically successful new products. Others, however, believe that all the technologies that are necessary to combat climate change exist already.

While only time will tell whether existing technologies at massive scale or really radical undiscovered technologies dominate the next generation of cleantech companies, this sector’s success story is far from over. In fact, it’s only just beginning.

New products and services What high performers are getting right

Innovation in products or services was cited as being most important in winning the competitive battle by 71% of respondents to our original Competing for growth study. Two quite distinct approaches emerged. Intense competition around incremental innovation to better meet the needs of current customers and often equally intense collaboration with third parties in tackling the transformational innovation that creates new markets.

The centrality of effective new product development is reinforced by our latest research. But the low price that is demanded in many emerging markets may require the convergence of the two approaches, through the adoption of more transformational innovation techniques to existing products. So, for example, the US$2,000 car is not creating anything new, but its challenging price requires a radically transformed approach to production.


Customer reach — being driven by current demandIncreasing product ranges significantly — some 30% of high •performers have increased their product range by more than 20% in the past two years

Focusing on current customers and employees as primary •sources of innovation

Operational agility — moving quickly from idea to marketFollowing a formal process for innovation, but with greater •clarity on “go/no go” and oversight by business management

Adopting a structured “from thought to finish” process with •launch and review built into the plan

Cost competitiveness — acting to capture more valueChoosing to invest to increase control — increasing marketing •spend to capture margin

Locating innovation closer to target markets — increasingly in •rapid-growth markets

Stakeholderconfidence—takingtheirstakeholderswiththem on the journey

Providing more detail on opportunity and risk • to external stakeholders

Identifying and rewarding innovative talent•


Customer reach Being driven by current demand

High-performing companies aim to “lead in their segment” when it comes to product innovation as such leadership helps shape a market-leading brand and avoids having to compete on price. Forty-four percent of low performers, by contrast, see themselves as “fast-followers.” Some 48% of high performers describe themselves as being “pioneers” in product development, compared with only 25% of low performers, and almost twice as many have radically rethought their approach to innovation in order to meet demand.

Consequently, high performers’ product portfolios and sales pipelines include a significantly higher percentage of new products — 46% of their sales came from new products developed in the past three years which they support through extensive marketing. In contrast, new products account for only 24% of low performers’ sales. And this has not happened by chance.

Effective account management is perceived by high performers as being the greatest source of growth for

the next two years. This has a fundamental impact on the product development process. Part of the process

of maximizing the return on existing accounts is introducing a broader range of products and services to

those accounts — both across the range of product value and the product life cycle. This is the top priority for

high performers.


Our employees

Existing customers

Potential customers

R&D facilities

Suppliers, retailers, wholesalers

Educational institutes

Other rapid-growth market experience

46

66

54

13

16

12

72

64

41

28

44

25

12

26

Most effective sources of innovation

Increasingproductrangessignificantly

The focus of high performers on better understanding the needs of the customer has resulted in an explosion of product development. Some 87% of all survey respondents have grown their portfolios of products over the past three years to exploit their market potential better. This seems remarkable at a time when competition is intense and cost management paramount, but reflects the fact that incremental innovation has become a main competitive tool. It also suggests that business on a broad scale has mastered the ability to produce variety without compromising on cost. They are replacing the economies of scale with the more complex economies of learning and sales.

But the scale of increase for high performers has been much more extensive: 54% have increased by over 11% in the past three years and 30% by more than 20%. The equivalent figures for low performers are only 17% and 6%. Indeed, for low performers, 48% have only increased by between 1% and 45%, and 21% stayed the same or declined.

New products and services

Customer segmentation and understanding your customersSegmentation is becoming more precise and sophisticated as companies strive to target the most profitable customers. IT should be championing the systematic collection, analysis and presentation of customer and market data to identify where the higher-margin opportunities lie.

Existing clients should naturally be a rich source of future business and many companies are looking to broaden the range of products and services offered, support account management and develop the customer life cycle concept. Customer knowledge is likely to be at the heart of such efforts.

Analysis allows for differential investment

By taking a more selective path, some companies may resist the temptation to expand into certain emerging markets. Others may even choose to take the tough and controversial decision to contract, exiting existing segments and axing renowned brands where margins are low or negative. Once more, IT can support such difficult choices, providing profitability analyses to help challenge long-held assumptions.

Moving into new markets brings a number of logistical challenges, not least providing service to different time zones, and IT can help ensure that customer care is geared up to support these changes.

Customer knowledge

Understanding the customer is the key to effective marketing, and IT can be at the center of a continuous feedback culture that encourages sales and service staff to provide information on existing and potential clients.

Innovation for growth IT’s role in the new global economy, Ernst & Young, April 2011.



Increased by greater than 20%

Increased by between 11% and 20%



Stayed the same

Decreased

6

11

19

10

15

30

24

16

48

16

16

Increase in range of products


Our employees

Existing customers

Potential customers

R&D facilities

Suppliers, retailers, wholesalers

Educational institutes

Other rapid-growth market experience

46

66

54

13

16

12

72

64

41

28

44

25

12

26

Most effective sources of innovation

Focusing on current customers and employees as sources of innovation

This explosion in product development, however, is focused on today’s demand. Most of the ideas come from current employees or customers. Indeed, innovating with a focus on potential, rather than current, customers seems to have a detrimental impact on current performance in that it is an approach favored by low performers. Our earlier work found that high performers have developed better customer analytics systems to understand the needs of their current customers and this seems reflected in their improved performance in product development.

But it also suggests that most of the effort is focused on incremental development. Indeed, fewer high performers are looking across their supply chain or to academic institutions, which suggests less focus on transformational initiatives with both their increased costs and longer time-frames.

Putting Tata Motors' employees at the heart of innovationLeading companies in emerging markets often produce innovative designs that reduce manufacturing costs and sometimes disrupt entire industries. For example, in India, Tata Motors’ US$2,900 Nano vehicle is priced at less than half the cost of any other car on the market worldwide, and a version is set to go on sale in Europe this year.

Prakash Telang, Managing Director of Tata Motors India, says it is crucial to create an environment and corporate culture that nurtures innovation and encourages continuous improvement. Within Tata, the corporate culture is not only geared toward driving innovation and product improvement, but is also aimed at engaging every employee to contribute to this process, from the shop floor to the boardroom.

Tata Motors expects and encourages their people to bring to work what they call a simple “three H formula”: hands, head and heart. Someone who is just doing their job for eight hours a day is using their hands. Aiming to solve a problem involves the head. And if they are doing all of that with passion, they are probably bringing their heart.

For Tata Motors, it is critically important to engage their people on all three Hs and to create an environment where everybody feels an integral part of the company, passionate about contributing and developing it forward. As Prakash puts it: “If we can all see how Tata Motors can grow and everybody contributes, big things can probably happen.”

Prakash Telang, Managing Director, interviewed by Ernst & Young, Planning for growth study, July 2010


Focusing on today’s customers requires, and results from, an accelerated speed of product development. Our

most recent research shows that high performers are significantly faster than they were three years ago

— and than their competition — in taking a product from idea to market. This speed seems to be driven by an

inclusive firm-wide process of innovation that focuses on people and on a clear set of criteria for determining

good ideas.


Significantly fasterthan 3 years ago

Slightly fasterthan 3 years ago

At the same speed

Slightly slowerthan 3 years ago

Significantly slowerthan 3 years ago

18

16

3

01

38

44

30

8

43

Time to develop new products and servicesThis increase in speed is dramatic. Eighty-one percent of high performers report that they are faster in developing products and services than three years ago and 38% report that their improvement is significant. While much of this improvement is the result of a focus on smaller incremental developments, not all of it is and the implications across the organization and its supply chain are immense. Nor is this improved performance the sole preserve of small start-up companies or particular sectors. Ford reports that accelerated innovation is one of the major factors in its improved performance, but this strategy is also central to the success of shoe manufacturers such as Geox and, cosmetics companies such as Nuxe.

Following a formal process for innovation

Great ideas can happen by chance, but that is a risky approach to commercial innovation. All companies put in place some form of process to encourage this. Earlier work by Ernst & Young — Igniting innovation — found that successful companies structure their approach to innovation and encourage their employees to develop ideas.

Our recent research confirms the importance of involving your own employees, but suggests that having a formalized process is not in itself a source of improved performance. The same number of high and low performers reported that they had such a process. Rather, the difference seems principally to arise in three areas:

Having a process that is designed to extend through testing to •include launch and review. Essentially, planning the route into market, rather simply into development.

Placing greater attention on “go/no go” decisions, rather than •letting projects drift on and use resource. This may cut down potential new opportunities, but it certainly cuts down actual expense. These decisions, however, do not seem to be based on purely short-term financial factors.

Putting the process under the direct oversight of country or •regional management who will have the responsibility of selling the product into its chosen market.

Operational agility Moving quickly from idea to market


Man on the moon drives innovationDanish mechanical and electronic component manufacturer Danfoss encourages innovation with Man on the Moon — a company-sponsored competition.

The competition was launched in 2004 as a means of supporting entrepreneurial learning and teasing out new product ideas that might not otherwise have come to light. Employees have the opportunity to develop a product, test its commercial possibilities and present it to a committee of the company’s top 10 leaders. The committee tests the ideas using specialist resources, such as supply chain experts, so that the idea can be rigorously tested.

The assessment process is deliberately exacting so that employees are forced to think about their project in the round. This is turn makes it more likely that the project will come to fruition. Man on the Moon reflects the company’s belief that the key to its long–term survival lies in becoming indispensible to customers.

Exceptional, Ernst & Young, January–June 2011.



Product and servicedevelopment process

Testing, launchand review process

Rewards for successful innovation

A “go/no go” decision process

A dedicated innovation team

Agreed process of financingfor new product launches

Direct oversight by countryor regional management

Agreed period and rate of financial return

Established relationships withuniversities and other stakeholders

77

62

58

53

60

55

51

4443

75

67

61

60

58

59

47

59

57

Formal innovation processesFollowingastructured“fromthoughttofinish”process

We asked companies to rate their performance on the innovation journey. High performers rated themselves significantly higher at all stages — from having the idea, through translating that into a product, to generating commercial returns. Success or failure at innovating clearly permeates the whole organization.

We also asked companies about the obstacles that they face — giving them options as to whether their concerns were about the inputs to the innovation process or the output. Hiring the right talent is the biggest obstacle for all, but high performers are particularly concerned about the broader input factors such as the educational level of their workforce, the lack of science or technology graduates and the lack of infrastructure. It is of interest that the only areas where low performers gave the majority response concerned the cost and time required to obtain patents — suggesting possibly their greater exposure to transformational innovation.


Locating innovation closer to target markets

Given that R&D costs equate to a third of the overall product price, we were keen to explore the much-discussed trend of moving R&D facilities into rapid-growth markets. We did not find this to be a primary factor in explaining current high performance. Indeed, at the moment, high performers are more likely to develop their products in developed locations rather than in emerging ones. This reflects a more compelling potential difference where R&D is located close to the intended market for the products. To date, as we found in our earlier study, high performance is often based on success within developed markets rather than in the main markets of tomorrow.

Investing to increase control — increasing marketing spend to capture margin

When we compared the cost elements of new products, there was a significant difference between high and low performers in the cost structures they employ. Not surprisingly, R&D accounts for the highest proportion for both — indeed, it is slightly higher for high performers, but there is a bigger difference in the overall cost structure that might explain more performance variation.

High performers have a higher element of labor and transport but, through a significantly higher level of marketing cost, they are capturing more of the eventual value of their product or service. They face up to 50% less in sales commission and lose 20%–30% less to distributors and up to 50% less in third-party markups. This suggests much stronger brand presence in the market place that is also consistent with being ahead of the market on product development.

High performers

Low performers

At R&D centres atcompany headquarters

In rapid-growth markets

At dedicated R&D locations worldwide

In developed markets

In the markets or regions wherethe products are mainly sold

At locations of our business partners

Within universities oracademic institutes

47

35

29

14

47

24

15

89

39

28

28

27

26

22

15

12

25

Where is innovation located?


R&D

Marketing (including discountsand special promotions)

Taxes, tariffs and other fees (e.g., import duties, quality certification)

Wages and salaries

Raw materials

Transport infrastructure (e.g., roads, rail)

Supplier costs

Legal and regulatory

Distance from production to market

Distributor’s margins

Sales/commissions

Retail mark-ups, product placement

39

25

25

22

21

13

15

20

14

8

813

41

30

29

27

22

22

18

18

7

19

16

15

Largest cost impact on pricing

New products tend to enjoy either a price or margin premium. They are either developed to fill a gap in

demand — hence a price premium — or to meet a demand more efficiently. This is the desired positioning that

high performers have attained, but it comes at a cost.

Cost competitiveness Acting to capture more value



TodayIn 5 years

0%–10% 11%–25% 26%–50% Above 50%

176 10 13

44

28

14

67

Proportion of R&D invested in emerging marketsToday, some 75% of product sales are generated from products that have not been invented or designed for rapid-growth markets. This, however, is forecast to change significantly. Looking ahead, we expect to see significant change, with companies increasingly dedicating R&D investment to rapid-growth markets and we expect product sales to follow swiftly. The significantly lower cost of operating R&D facilities and, importantly, the availability of well-educated talent at relatively lower cost, are most often quoted but closely followed by proximity to market.

But the bigger opportunity may still be yet to come. It may be necessary to locate both R&D and production facilities within India, for example, to both design and produce the iconic “$2,000 car” that has been much discussed as being required for the mass market in India. Having mastered this challenge, however, an even bigger opportunity may exist to refocus back on the developed markets. The value creation opportunities available to that company in a “$20,000 car” environment could be immense.


Providing more detail to external stakeholders on opportunity and risk

While seeking more inclusiveness in generating ideas, high performers have developed a tighter process for determining which ideas they will seek to develop. This process is based on a deep and distinctive view of their market.

That deeper market perspective supports more compelling stakeholder communication. High performers are clearer about the strategic vision that they have for their new products. They are much more precise about the current and planned investments and the forecast revenue that they expect. Equally, however, high performers are ahead in identifying the risks and explaining the potential returns from developing new products and services.


Strategic direction fornew products and services

Company vision for innovation

Current and planned investment levels

Revenue forecasts for new products

Number and typesof products in pipeline

57

65

30

25

62

51

27

9

30

39

Information provided to external stakeholders on new products and services

High performers take their stakeholders with them — but this can be difficult when you are moving into new

areas. Given that their positioning is based on developing new products, communication with stakeholders

takes on a critical role.

Stakeholder confidence Taking their stakeholders with them on the journey

Identifying and rewarding innovative talent

High performers report that “growth prospects for the business” are the second most important factor for engaging employees and retaining talent. Such growth can only be fueled with a healthy pipeline of innovative products. Given the increasing importance of employees in determining innovative ideas, we asked companies about their policies toward rewarding innovation:

30% of all respondents reported that there was • no reward for innovative thinking

Over 40% reported that staff would only be rewarded when the •results of their innovation was known

Only 28% believed that staff involved in a failed innovation •project would be given another chance to succeed

28% reported that they reward innovative staff as being part of •a team rather than individually

For a majority of companies, therefore, individual innovation from staff is a risky and potentially unrewarding activity. High performers share many of these practices, except they are significantly more likely to identify and materially reward innovative staff. This could be an area for further differential action.



Key questions for managementWhat proportion of your sales is driven by new •products or services?

How do you involve your people and your clients in •your innovation?

How quickly can you develop a new product or •service?

What is your innovation process?•How can you control price to capture value?•How can you take your stakeholders with you on •your journey?

How do you identify and reward innovation within •your company?



New talents and skills: what we learnt last time

The first Competing for growth study may not have focused directly on talent management but, even so, there were some strong messages.

For example, one of the actions which set high performers apart was their recognition of the importance of investing in their people. High performers were almost 70% more focused on equipping their teams to be more productive and 26% more focused on improved communication.

High performers also reported facing significantly higher labor cost inflation, as they sought to attract and retain talent.

Our most recent research provides more insight into what high performers are doing in order to win, develop and diversify their talent.



Talent management: attracting and retaining the best and brightestWhether they operate in developed or emerging markets, a focus of any successful company will be building and maintaining a highly capable workforce to meet its current and future business objectives.

Developed markets

One multinational manufacturer of pharmaceutical and •medical devices has recently undergone a US$90 million finance transformation. Previously a highly decentralized operation, it concluded that standardizing processes across its organization had become a priority. The aim was to create shared services centers located in four key regions in developed and emerging markets for its finance function.

Another example is a large insurance company based in the •United States. In order to strengthen its talent management structure, the group created a competency model based on leadership, foundational and functional competencies. Its staff were then assessed and evaluated against these competencies — people evaluated themselves, their managers and their peers. The findings provided the basis for new plans on recruitment and developing existing talent.

Emerging markets

The dynamic and ambitious CEO of a billion-dollar insurance •company operating in 27 countries — primarily in Latin America and the Caribbean — believed his organization should develop its management better. As the company was increasing its presence in emerging markets, it needed to identify the necessary skills and understand how to attract the talent. The final challenge was ensuring that the talent strategy is aligned with the business strategy.

Another example is one of the largest beverage distributors •in the world, which is tripling the number of its finance professionals in Africa in three years. The workforce analytics, which is ongoing in six emerging countries on that continent, involves establishing what talent is available in the market and which universities are producing the best graduates. If insufficient talent is available, the company is looking at how to develop the talent internally, or from its global workforce, and whether teams should relocate to train local staff. This is particularly critical as each one of those emerging markets requires different skills, competencies, experiences and profiles of individuals to be successful.

Regardless of strategy or sector, high performers show a higher recognition of the central importance of talent in delivering any program. Some may find the term “human capital” dehumanizing, but it remains a very accurate description of the value that can only be created by recruiting great talent and managing it effectively. Central to all efforts to change or enhance service delivery is the ability to harness skills and experiences in new ways.

Unlike other areas of our research, this is not an area where high performers appear to find the challenge any easier; indeed, in their pursuit of top talent, they face a range of issues that others escape. But their recognition of the centrality of talent to their competitive success makes them relentless in its acquisition.


Customer reach — building the right team to activatePaying greater attention to technical and operational roles in •setting up new operations

Going outside the organization and traditional sources for •management and skills

Operationalagility—beingmoreselective,butfastertodevelop and deploy

Investing significant time and effort to recruit senior •management, while moving quickly for rapid-growth opportunities

Putting greater focus on fast routes of staff development•

Moving resource into markets, but with an explicit knowledge •transition expected

Cost competitiveness — engaging in a battle for talentExperiencing higher staff turnover and challenges in getting the •talent they need

Being willing — and able — to pay for talent and recognizing this •is only part of the equation

Stakeholderconfidence—moreengagedwithengagement

Starting from a better position to grow following the recession•

Focusing on engagement through commercial effectiveness •

New talents and skills What high performers are getting right


Customer reach Building the right team to activate quickly

New talents and skills

Paying greater attention to technical and operational roles in setting up new operations

There are a number of roles that need to be filled when entering a new market from the manager of the subsidiary to all the functional roles in the organization. Of interest, high performers are much more attentive to the technical and operational skills that they will need — reflecting, perhaps, greater recognition of the need for speed to get into production.

But they don’t expect to hire all these operational and technical skills locally. With the focus on local knowledge, all companies hire sales and marketing resource locally — high performers, notably, extend this to their finance function. This is consistent with their concerns on regulation and tax exposure. They want local knowledge, but high performers also recognize the need to ensure that the local operation is up and running quickly and they are willing to move resource into the market to achieve this.

We asked companies about how they assessed and recruited the local talent that they needed in markets outside the head office. While all respondents focused on open recruitment processes and targeting other competitors, high performers were significantly more likely to transfer the resource into the market from other countries. The greater understanding of both their needs and the local markets that we have seen in high performers may also be reflected in their lower use of headhunters or search executives than low performers.

Customer reach is about broadening the market footprint of the company — both within current customers

and new markets. This requires developing greater market understanding and translating that into tailored

action. Our earlier research found that high performers were significantly faster at getting to break even

from their new investments. This appears to be driven by both the mixture of skills that they hire or import

and the effectiveness of integrating those skills quickly into a productive operation.

Head of subsidary/business unit

Technical skills

Finance

Sales

Operations

Marketing

Innovators

53

29

39

37

30

1819

47

45

44

35

26

40

39

Skill areas to fill when entering new markets

Key roles


Head of subsidary/business unit

Technical skills

Finance

Sales

Operations

Marketing

Innovators

58

19

32

27

17

1514

60

33

32

36

36

17

31

Local hires


Going outside the organization and traditional sources for management and skills

Challenged to find top talent — and/or frustrated by their ability to develop the right skills — high performers are more likely to go outside the organization for management talent and key skills. Fifty-three percent of high performers reported that they went outside for more than 10% of their senior management, compared with only 39% of low performers. This is even more significant for key skills — 43% of high performers bring in more than 25% of their key skills from outside, compared with only 31% of low performers.

And they are looking more widely to find those skills and leadership talents. The pursuit of increased diversity is now being driven by an effectiveness agenda to build on the ethical and efficiency arguments that have driven this debate in the past. Diverse management teams are strongly perceived by respondents to make better decisions for the more complex market in which we are now operating. This view is shared by high and low performers alike — although twice as many low performers report being challenged to achieve diversity at senior levels.

The makeup of most companies’ management does not suggest great diversity has yet been achieved in practice. One explanation for this contradiction could be the breadth of meaning that attaches to the term “diversity.” Eighty percent of all respondents say that diversity of nationality is helpful to international expansion. Of particular note, high performers are almost twice as likely to have brought talent from rapidly developing economies into global management positions to accelerate their development and increase their impact.


Domestic management withemerging market skills

Women

Ethnic minorities

Emerging market managersfor global positions

Staff from other sectors or professions

Staff without formalacademic qualifications

45

44

44

34

2929

56

52

35

26

36

46

Sources of management talent

However, the diversity that all respondents prioritize is diversity of experience, rather than other types of difference. But high performers’ focus on top talent may be driving change. While professing no greater priority for broad diversity targets, high performers report much better access to many of the various talent pools available.

When we separate the response of HR directors from other managers, we see both a much broader interest in wider issues of diversity and a greater recognition of the challenges it can bring. Sixty-eight percent of all HR directors responded that getting diverse teams to work together is one of the hardest talent-management issues, but this view is not widely shared by senior management.


Operational agility Being more selective, but faster to develop and deploy


Investingsignificanttimeandefforttorecruitseniormanagement,whilemovingquicklyforrapid-growthopportunities

Speed of recruitment does not seem to be a factor driving high performance. In developed markets, where they are most established, high performers, are taking significantly longer to recruit than low performers. While some high performers report they can act quickly in emerging markets — 19% within three months — a full 24% report that even in these markets it takes them longer than a year. This reflects our wider findings that high performers are truly focused on getting the talent that they need. While they may be actively exploring the widest talent pools, they are not dropping their standards to solve an immediate problem.

Operational agility requires an organization to operate with great speed and flexibility, which has implications

for all parts of its operation, including HR. In particular, we would expect to see these goals reflected in high

performers’ approach to the fundamental HR challenges of recruitment, development and deployment.


Within 3 months

Within 6 months

Within a year

Beyond a year

27

43

4 4

34 3429

26

Timeframe for recruiting senior management

22

35 35

24

1517

32

19

Within 3 months

Within 6 months

Within a year

Beyond a year



Provides key staff with responsibility early

Senior-level mentoring

Exposure to a broad range of roles

Exposure to a broad rangeof business areas

Fast-track promotion

Accelerated training/management program

Experience running foreign operations

The company does not operatea specific plan

49

36

48

42

34

23

1011

47

47

44

35

26

26

18

35

Methods for accelerating people development

Again, when we separate the responses from HR directors, we see that they are much more cautious about the time taken to recruit. Only 7% believe that they can recruit within three months in developed markets — and only 4% think they can do this in rapidly developing economies. Sixty-two percent of HR directors believe it will take up to 12 months to recruit senior management in developed countries and some 53% believe that this is also the case in rapid-growth markets.

Putting greater focus on fast routes of staff development

“Providing adequate training and development” was one of the top challenges reported by high performers. When asked to choose between a range of development tools and policies, it is noticeable that higher performers have a significantly greater focus on the practical, the tailored and the fast. Low performers reported a focus on letting their people have a broad range of exposure to different business areas and different business roles. High performers are much more interested in fast-tracking promotion and focused development, giving the tailored attention of senior level mentoring and getting people learning on the job.

In developed markets

In emerging markets


Operational agility Being more selective, but faster to develop and deploy


Foreign postings are an essentialpart of a managers’ career development

Sent to solve particularoperational problems and are brought

home shortly after this is achieved

Sent primarily to fill skills gapsrather than to run a foreign operation

Sent with the specific aim to train up local managers until they are capable of taking over

Sent as a matter of course to runany new markets the company enters

Sent mainly to emergingmarkets where business skills are lacking

There is no particular policy or strategicthinking behind expatriate postings

28

32

21

16

16

1528

40

31

23

9

20

19

20

Policy towards foreign posting of managementMovingresourceintomarkets,butwithanexplicitknowledge transition expected

Mobility is a critical feature of flexibility. High performers recognize the need to move technical expertise into the new market and have developed mobility programs that can quickly move this talent, without damage to the career prospects of that individual. They also have systems for ensuring that the expatriates can return or move to other parts of the world at an appropriate time, and with recognition of the contribution they have made. Half of low performers have yet to develop a strategy to address this.

When new investments are made, senior management is transferred to that market, but with an explicit remit to train the local management. This is not so much to develop skills, as these may not be missing, but is more to bring them into the company’s way of operation. Interestingly, high performers do not have the one-size-fits-all management approach that would require all senior management to have spent time in emerging markets. No one’s interests are served by losing hard-won talent through unsuitable postings.

The real estate sector, for example, is likely to see movement of people around organizations on an international basis. Currently, a largely unregulated industry, this sector is open to new entrants, the major barrier being possession of sufficient capital. Certainly, people move between investors, developers and advisers very quickly — retention is an ongoing challenge. And with the supply of equity outnumbering opportunities, the best talent is likely to move to those new entrants that have the capital.


Cost competitiveness Engaging in a battle for talent


Experiencing higher staff turnover and challenges in getting the talent they need

Staff turnover is recognized to be very high in emerging markets, but despite all their efforts, high performers face similar or slightly higher levels of staff turnover than low performers.

Cost competitiveness, as we have defined it, is when a company has control over its pricing and uses that as

a starting point for optimizing its cost position. Applied to the HR function, this suggests a situation where

the company has a clear view of what talent it needs and the resources to acquire or develop it. But talent is

in short supply — it costs, it has ambition and it has other possible homes — and it cannot be controlled.

-5% to -1%

0%

1%–5%

6%–10%

11%–15%

Above 15%

6

22

33

21

51

4

14

37

19

15

23


2

8

34

31

112

1

5

30

38

20

19

-5% to -1%

0%

1%–5%

6%–10%

11%–15%

Above 15%

Salary inflation for key staff in emerging markets

2011

2012

Staff turnover in emerging markets — majority response

All High LowAnnual

staff turnover

% Annual staff

turnover

% Annual staff

turnover

%

Brazil 11%–15% 32 6%–10% 26 11%–15% 17

Russia 6%–10% 35 6%–10% 24 6%–10% 26

India 6%–10% 36 6%–10% 30 6%–10% 29

China 6%–10% 33 6%–10% 28 6%–10% 25

Other Eastern Europe

6%–10% 33 6%–10% 26 6%–10% 25

Other Far East 6%–10% 29 1%–5% 24 6%–10% 21

Other Latin America

6%–10% 33 6%–10% 23 6%–10% 21

Being willing — and able — to pay for talent and recognizing this is only part of the equation

High performers are, however, better placed to compete for talent. This is reflected in the findings on pay. Fifty-nine percent say pay has increased by over 6% — and next year this rises to 76%. Sixty-nine percent of low performers say pay has increased by less than 5%, which falls next year to 40%.

Indeed, when talking with CFOs about their experience in entering rapidly developing markets, both high and low performers reported similar problems. While they shared challenges with the levels of staff turnover and dealing with local unions, high performers are much more aware of the cultural differences that must be addressed and have less challenge with integrating the local team into their business. But high performers report much greater challenges in getting the talent they need — and in keeping it.


This increased competition for talent is also reflected in the structure of compensation where employees at high performers are more likely to have:

A larger portion of their salary guaranteed•

A larger guaranteed bonus•

Less share options•

However, despite their deeper pockets, this is not simply a management choice to pay more. Compared with low performers, high performers are much less likely to see improving pay as an effective way to motivate staff. Competing for talent is intense — not only does talent have a price, but it may be particularly demanding in the breadth of return it wants for its efforts.

The power of the motivational e-mailDiscussing HR issues always requires cultural factors to be taken into consideration. We asked respondents to identify which approaches from senior management contributed most to employee motivation and productivity. High perfomers reported on the power of strict target-based assessment of staff, developing corporate “myths” to create a performance culture and promoting training, but the biggest difference was their belief in the power of company-wide motivational e-mails.

When we looked at where respondents came from, however, the impact of cultural variation became clear.

Regularly being seenon the “shop-floor”

Emphasis on internal promotions

Improving working conditions

Strict target-basedassessment of staff

Conveying company “myths” andstories that illustrate company culture

Improving pay

Promoting training andlearning programs

Ensuring that middle managers arecapable of good people management

Company wide motivational e-mails

EMEIAAll respondentsAmericas

Asia-Pacific

45

44

46

42

41

36

36

32

32

38

38

35

38

41

40

3334

4725

25

25

24

24

21

27

1716

15

14

122

22

27

20

51

55

Approaches contributing most to employee motivation and productivity



Stakeholder confidence requires taking your stakeholders on your journey with you, whether internal or

external. We have been interested in seeing whether different approaches to employee management and

engagement may explain the difference in performance.

Starting from a better position to grow

Clearly, the direction that companies need to take is based on both their goal and their current position. Some high performers are clearly starting from a better position because of the actions they took during the past years and the experience of their employees, especially during the recession. Fewer high performers had to make large numbers of staff redundant or freeze recruitment. Indeed, almost twice the number of high performers continued to recruit during the past two years for rapid-growth markets.


Staffing was increased in key,high growth markets

Staff turnover is a key challenge in emerging markets

Pay for key talent in emergingmarkets continues to rise

Staffing levels were reduced>5% in our main markets

Staffing levels were frozen or reduced<5% in our main markets

Our company has focused ontraining and development

rather than pay

26

26

31

21

1728

45

42

31

35

25

37

The effects of the downturn on recruitment


Opportunities to improve skills

Greater staff autonomy/empowerment

Prospects for promotion

Salary level

Flexibility of working

Job security

Variable remuneration

Fit of individual to role

43

39

23

27

21

18

1817

46

42

30

28

19

23

16

23

Job-related issues contributing most to employee engagement


Clear vision from the management team

Growth prospects of your business

Informal, friendly, collegialworkplace culture

Motivational ability of one’simmediate line manager

Profitability of the company

Brand reputation of the company

Extent of personal interactionwith senior management

Competence of one’simmediate line manager

49

41

53

32

26

18

1526

56

49

46

42

23

29

20

27

Company-related issues contibuting most to employee engagement

Stakeholder confidence Being more engaged with engagement

Focusing on engagement through commercial effectiveness

High performers take a more commercial approach to the motivation and engagement of their teams. They design jobs that reflect their belief — or to meet the demand — that roles should be dynamic and people are most motivated by the desire to improve their skills and drive their own career.

All our respondents recognized that salary level was only one of the motivational factors — and this was identical in the responses regardless of performance. High performers, however, are more likely than low performers to believe in the motivational impact of autonomy, promotional prospects, opportunities for skills acquisition, flexible working and variable remuneration.

This is reflected in their approach to management where they believe in a much more proactive dialogue with their employees. High performers believe that management vision — especially around growth and profitability — and the active engagement of the immediate manager are believed to be more important than stressing the merits of the workplace or the competence of the manager.

Small though these differences may appear, there is a significant difference in practice between the proactive management challenge and engagement that high performers are reporting and a more static, entitlement perspective of the power of the organization.

35Competing for growth How business is growing beyond boundaries 35

Key questions for managementHow clear are you about your talent needs?•How effective have you been in tapping the new •markets for talent?

Is your organization as diverse as it needs to be?•How quickly can you develop talent?•What is your approach to staff mobility?•Can you really compete for top talent in your sector?•How engaged is your workforce?•

Competing for growth How business is growing beyond boundaries


About this report

The benchmark findings for this report are drawn from two studies conducted between January and

February 2011 in parallel for Ernst & Young by the Economist Intelligence Unit. To explore what companies

were doing as they entered new markets and innovated, we interviewed some 400 C-suite and marketing

professionals. To explore how companies were addressing talent management, we interviewed 400 C-suite

and HR directors.

Geographic location Revenue (annual global revenue USD)

Stakeholder Sector

Asia-PacificMiddle East and Africa

Eastern EuropeWestern Europe

Latin AmericaNorth America 22

446

36

20

Chief marketing officer

CRO/Head of Risk

COO

CEO

Board member

Human resources director

Treasurer/Controller

Head of business unit

Other C-level executiveHead of department

President/MDSVP/VP/Director

CFO

CIO

Manager

233

77

910

1636

111111

Government & public sectorAutomotive

Retailing & wholesaleOther transportation

Mining & metalsOther

Telecoms

Life sciences

Professional services

Media & entertainment

Manufacturing

Real estate

Oil & gas

Power & utilities

TechnologyConsumer products

Financial services

222

333

4555

67

89

1116

7

$10b or more$5b to $10b

$1b to $5b$500m to $1b

Less than $500m

96

29

3323

All tables show percentage of respondents

About this report

Formoreinformationaboutourfindingsforyoursectororyourcountry,pleasecontactyourlocalErnst&Youngoffice.Alternatively,pleasevisitwww.ey.com/competing-for-growthor,forusersonthemove,visitwww.ey.mobi.

Ernst & Young

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About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com

© 2011 EYGM Limited. All Rights Reserved.

EYG No. AU0827

In line with Ernst & Young’s commitment to minimize its impact on the environment, this document has been printed on paper with a high recycled content.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

The views of third parties set out in this publication are not necessarily the views of the global Ernst & Young organization or its member firms. Moreover, they should be seen in the context of the time they were made.

Competing for growth

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